REPORTABLE

IN THE SUPREME COURT OF INDIA

CRIMINAL APPELLATE JURISDICTION

CRIMINAL APPEAL NO. 963   OF 2010 [Arising out of SLP (Crl.) No. 6369 of 2007]

Damodar S. Prabhu                                             … Appellant (s)

Versus

Sayed Babalal H.                                                 … Respondent (s)  

WITH

CRIMINAL APPEAL NOS.  964-966  OF 2010 [Arising out of SLP (Crl.) Nos. 6370-6372 of 2007]  

O  R  D  E  R  

1. Leave granted.  

2. The present appeals are in respect of litigation involving the  

offence  enumerated  by  Section  138  of  the  Negotiable  

Instruments Act, 1881 [Hereinafter ‘Act’].  It is not necessary  

for us to delve into the facts leading up to the institution of  

proceedings  before  this  Court  since  the  appellant  and  the  

respondent have arrived at a settlement and prayed for  the  

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compounding of the offence as contemplated by Section 147 of  

the Act.  It would suffice to say that the parties were involved  

in commercial transactions and that disputes had arisen on  

account  of  the  dishonour  of  five  cheques  issued  by  the  

appellant.  Thereafter,  the  parties  went  through  the  several  

stages of litigation before their dispute reached this Court by  

way of  special  leave petitions.  With regard to the impugned  

judgments delivered by the High Court of Bombay at Goa, the  

appellant has prayed for the setting aside of his conviction in  

these matters by relying on the consent terms that have been  

arrived  at  between  the  parties.  The  respondent  has  not  

opposed this plea and, therefore, we allow the compounding of  

the offence and set aside the appellant’s conviction in each of  

the impugned judgments.  

3.  However,  there  are  some  larger  issues  which  can  be  

appropriately addressed in the context of the present case. It  

may be recalled that Chapter XVII comprising sections 138 to  

142 was inserted into the Act by the Banking, Public Financial  

Institutions  and  Negotiable  Instruments  Laws  (Amendment)  

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Act, 1988 (66 of 1988). The object of bringing Section 138 into  

the statute was to inculcate faith in the efficacy of banking  

operations  and  credibility  in  transacting  business  on  

negotiable instruments. It was to enhance the acceptability of  

cheques in settlement of liabilities by making the drawer liable  

for penalties in case of bouncing of cheques due to insufficient  

arrangements made by the drawer, with adequate safeguards  

to  prevent  harassment  of  honest  drawers.  If  the  cheque  is  

dishonoured for insufficiency of funds in the drawer’s account  

or  if  it  exceeds  the  amount  arranged  to  be  paid  from that  

account, the drawer is to be punished with imprisonment for a  

term which may extend to two years, or with fine which may  

extend to twice the amount of the cheque, or with both. It may  

be noted that when the offence was inserted in the statute in  

1988, it carried the provision for imprisonment up to one year,  

which was revised to two years following the amendment to  

the Act in 2002. It is quite evident that the legislative intent  

was to provide a strong criminal remedy in order to deter the  

worryingly high incidence of dishonour of cheques. While the  

possibility of imprisonment up to two years provides a remedy  

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of a punitive nature, the provision for imposing a ‘fine which  

may  extent  to  twice  the  amount  of  the  cheque’  serves  a  

compensatory purpose. What must be remembered is that the  

dishonour of a cheque can be best described as a regulatory  

offence that has been created to serve the public interest in  

ensuring  the  reliability  of  these  instruments.  The impact  of  

this offence is usually confined to the private parties involved  

in commercial transactions.   

4. Invariably, the provision of a strong criminal  remedy has  

encouraged the institution of a large number of cases that are  

relatable  to the offence contemplated  by Section  138 of  the  

Act.  So much so,  that  at  present a disproportionately  large  

number of cases involving the dishonour of cheques is choking  

our  criminal  justice  system,  especially  at  the  level  of  

Magistrates’  Courts.  As  per  the  213th Report  of  the  Law  

Commission  of  India,  more  than  38  lakh  cheque  bouncing  

cases were pending before various courts in the country as of  

October 2008. This is putting an unprecedented strain on our  

judicial system.

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5. Mr. Goolam E. Vahanvati, Solicitor General (now Attorney-

General  for  India)  had  appeared  as  amicus  curiae  in  the  

present  matter  and  referred  to  the  facts  herein  as  an  

illustration of  how parties  involved in  cheque bounce cases  

usually  seek the compounding of  the  offence  at  a  very late  

stage. The interests of justice would indeed be better served if  

parties resorted to compounding as a method to resolve their  

disputes at an early stage instead of engaging in protracted  

litigation before several forums, thereby causing undue delay,  

expenditure and strain on part of the judicial system. This is  

clearly a situation that is causing some concern, since Section  

147  of  the  Act  does  not  prescribe  as  to  what  stage  is  

appropriate  for  compounding  the  offence  and  whether  the  

same can be done at the instance of the complainant or with  

the leave of the court. The learned Attorney General stressed  

on  the  importance  of  using  compounding  as  an  expedient  

method to hasten the  disposal  of  cases.  In this  regard,  the  

learned Attorney General has proposed that this Court should  

frame some guidelines to disincentivise litigants from seeking  

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the  compounding  of  the  offence  at  an unduly  late  stage  of  

litigation. In other words, judicial directions have been sought  

to  nudge  litigants  in  cheque  bounce  cases  to  opt  for  

compounding  during  the  early  stages  of  litigation,  thereby  

bringing down the arrears.         

6.  Before examining the guidelines proposed by the learned  

Attorney  General,  it  would  be  useful  to  clarify  the  position  

relating to the compounding of offences under the Negotiable  

Instruments Act,  1881. Even before the insertion of Section  

147 in the Act (by way of an amendment in 2002) some High  

Courts  had  permitted  the  compounding  of  the  offence  

contemplated  by  Section  138  during  the  later  stages  of  

litigation. In fact in O.P. Dholakia v. State of Haryana, (2000)  

1 SCC 672, a division bench of this Court had permitted the  

compounding  of  the  offence  even  though  the  petitioner’s  

conviction  had  been  upheld  by  all  the  three  designated  

forums. After noting that the petitioner had already entered  

into  a  compromise  with  the  complainant,  the  bench  had  

rejected  the  State’s  argument  that  this  Court  need  not  

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interfere with the conviction and sentence since it was open to  

the parties to enter into a compromise at an earlier stage and  

that they had not done so. The bench had observed:-

“…  Taking  into  consideration  the  nature  of  the  offence  in  question  and  the  fact  that  the  complainant and the accused have already entered  into a compromise, we think it appropriate to grant  permission in the peculiar facts and circumstances  of the present case, to compound.”    

7.  Similar  reliefs  were  granted  in  orders  reported  as  

Sivasankaran v.  State of Kerala & Anr., (2002) 8 SCC 164,  

Kishore Kumar v. J.K. Corporation Ltd., (2004) 12 SCC 494  

and  Sailesh Shyam Parsekar v.  Baban,  (2005) 4 SCC 162,  

among  other  cases.  As  mentioned  above,  the  Negotiable  

Instruments  Act,  1881  was  amended  by  the  Negotiable  

Instruments (Amendment and Miscellaneous Provisions) Act,  

2002 which inserted a specific provision, i.e. Section 147 ‘to  

make the offences under the Act compoundable’. We can refer  

to  the  following  extract  from the  Statement  of  Objects  and  

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Reasons  attached  to  the  2002  amendment  which  is  self-

explanatory:-  

“Prefatory  Note  –  Statement  of  Objects  and  Reasons. –  The Negotiable  Instruments  Act,  1881  was  amended  by  the  Banking,  Public  Financial  Institutions  and  Negotiable  Instruments  Laws  (Amendment) Act, 1988 wherein a new Chapter XVII  was incorporated for penalties in case of dishonour  of  cheques  due  to  insufficiency  of  funds  in  the  account  of  the  drawer  of  the  cheque.  These  provisions  were  incorporated  with  a  view  to  encourage  the  culture  of  use  of  cheques  and  enhancing  the  credibility  of  the  instrument.  The  existing  provisions  in  the  Negotiable  Instruments  Act, 1881, namely, Sections 138 to 142 in Chapter  XVII  have  been  found  deficient  in  dealing  with  dishonour  of  cheques.  Not  only  the  punishment  provided in the Act has proved to be inadequate, the  procedure  prescribed  for  the  courts  to  deal  with  such matters  has been found to  be cumbersome.  The  courts  are  unable  to  dispose  of  such  cases  expeditiously in a time bound manner in view of the  procedure  contained  in  the  Act.  …”  (emphasis supplied)  

In order to address the deficiencies referred to above, Section  

10 of the 2002 amendment inserted Sections 143, 144, 145,  

146 and 147 into the Act, which deal with aspects such as the  

power of the Court to try cases summarily (Section 143), Mode  

of  service  of  summons  (Section  144),  Evidence  on  affidavit  

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(Section  145),  Bank’s  slip  to  be  considered  as  prima  facie  

evidence of certain facts (Section 146) and Offences under the  

Act to be compoundable (Section 147). At present, we are of  

course concerned with Section 147 of the Act, which reads as  

follows:-  

“147.  Offences  to  be  compoundable.  –  Notwithstanding anything contained in the Code of  Criminal Procedure, 1973 (2 of 1974), every offence  punishable under this Act shall be compoundable.”  

8. At this point, it would be apt to clarify that in view of the  

non-obstante clause, the compounding of offences under the  

Negotiable Instruments Act, 1881 is controlled by Section 147  

and the scheme contemplated by Section 320 of the Code of  

Criminal Procedure [Hereinafter ‘CrPC’] will not be applicable  

in the strict sense since the latter is meant for the specified  

offences under the Indian Penal Code. So far as the CrPC is  

concerned,  Section  320  deals  with  offences  which  are  

compoundable, either by the parties without the leave of the  

court or by the parties but only with the leave of the Court.  

Sub-section (1) of Section 320 enumerates the offences which  

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are compoundable without the leave of the Court, while sub-

section (2) of the said section specifies the offences which are  

compoundable with the leave of the Court.  Section 147 of the  

Negotiable  Instruments  Act,  1881  is  in  the  nature  of  an  

enabling  provision  which  provides  for  the  compounding  of  

offences prescribed under the same Act, thereby serving as an  

exception to the general rule incorporated in sub-section (9) of  

Section 320 of the CrPC which states that ‘No offence shall be  

compounded  except  as  provided  by  this  Section’.  A  bare  

reading of this provision would lead us to the inference that  

offences punishable under laws other than the Indian Penal  

Code also cannot be compounded. However, since Section 147  

was inserted by way of an amendment to a special law, the  

same will  override  the  effect  of  Section 320(9)  of  the  CrPC,  

especially  keeping  in  mind  that  Section  147  carries  a  non-

obstante clause

9.  In  Vinay Devanna Nayak v.  Ryot Sewa Sahakari  Bank  

Ltd., (2008) 2 SCC 305, this Court had examined ‘whether an  

offence punishable under Section 138 of the Act which is a  

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special  law  can  be  compounded’.  After  taking  note  of  a  

divergence  of  views  in  past  decisions,  this  Court  took  the  

following position (C.K. Thakker, J. at Para. 17):-

“ … This provision is intended to prevent dishonesty  on the part of the drawer of negotiable instruments  in issuing cheques without sufficient funds or with  a view to inducing the payee or holder in due course  to act upon it. It thus seeks to promote the efficacy  of  bank  operations  and  ensures  credibility  in  transacting  business  through  cheques.  In  such  matters,  therefore,  normally  compounding  of  offences  should  not  be  denied.  Presumably,  Parliament  also  realised  this  aspect  and  inserted  Section  147  by  the  Negotiable  Instruments  (Amendment  and  Miscellaneous  Provisions)  Act,  2002 (Act 55 of 2002). …”   

In the same decision, the court had also noted (Para. 11):-

“…  Certain  offences  are  very  serious  in  which  compromise or settlement is not permissible. Some  other offences, on the other hand, are not so serious  and the law may allow the parties to settle them by  entering into a compromise. The compounding of an  offence signifies that the person against whom an  offence  has  been  committed  has  received  some  gratification  to  an  act  as  an  inducement  for  his  abstaining from proceeding further with the case.”  

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10. It would also be pertinent to refer to this Court’s decision  

in R. Rajeshwari v. H.N. Jagadish, (2008) 4 SCC 82, wherein  

the following observations  were made    (S.B. Sinha, J.  at  

Para. 12):-

“Negotiable Instruments Act is a special Act. Section  147 provides for a non obstante clause, stating:  

147.  Offences  to  be  compoundable.  –  Notwithstanding  anything  contained  in  the  Code of Criminal Procedure, 1973 (2 of 1974),  every offence punishable under this Act shall  be compoundable.   

Indisputably, the provisions of the Code of Criminal  Procedure,  1973  would  be  applicable  to  the  proceedings  pending  before  the  courts  for  trial  of  offences under the said Act. Stricto sensu, however,  the table appended to Section 320 of the Code of  Criminal  Procedure  is  not  attracted  as  the  provisions  mentioned  therein  refer  only  to  provisions of the Penal Code and none other.”   

11. The compounding of the offence at later stages of litigation  

in cheque bouncing cases has also been held to be permissible  

in a recent decision of this Court, reported as K.M. Ibrahim v.  

K.P.  Mohammed  &  Anr.,  2009  (14)  SCALE  262,  wherein  

Kabir, J. has noted (at Paras. 11, 12):-

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“11. As far as the non-obstante clause included in  Section 147 of the 1881 Act is concerned, the 1881  Act being a special statute, the provisions of Section  147 will have an overriding effect over the provisions  of the Code relating to compounding of offences. …

12. It is true that the application under Section 147  of the Negotiable Instruments Act was made by the  parties  after  the  proceedings  had been concluded  before the Appellate Forum. However, Section 147 of  the  aforesaid  Act  does  not  bar  the  parties  from  compounding an offence under Section 138 even at  the appellate stage of the proceedings. Accordingly,  we find no reason to  reject  the  application under  Section  147  of  the  aforesaid  Act  even  in  a  proceeding under Article 136 of the Constitution.”  

12. It is evident that the permissibility of the compounding of  

an offence is linked to the perceived seriousness of the offence  

and the nature of the remedy provided. On this point we can  

refer to the following extracts from an academic commentary  

[Cited from: K.N.C. Pillai, R.V. Kelkar’s Criminal Procedure, 5th  

edn. (Lucknow: Eastern Book Company, 2008) at p. 444]:-

“A crime is essentially a wrong against the society  and the State. Therefore, any compromise between  the accused person and the individual victim of the  crime should not absolve the accused from criminal  responsibility.  However,  where  the  offences  are  essentially  of  a  private  nature  and  relatively  not  quite  serious,  the  Code  considers  it  expedient  to  

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recognize some of them as compoundable offences  and  some  others  as  compoundable  only  with  the  permission of the court. …”    

In  a  recently  published  commentary,  the  following  

observations  have  been  made  with  regard  to  the  offence  

punishable  under  Section 138 of  the  Act  [Cited from:  Arun  

Mohan,  Some thoughts  towards  law reforms on  the  topic  of   

Section  138,  Negotiable  Instruments  Act  –  Tackling  an  

avalanche of cases (New Delhi: Universal Law Publishing Co.  

Pvt. Ltd., 2009) at p. 5]  

“…  Unlike  that  for  other  forms  of  crime,  the  punishment here (in so far as the complainant is  concerned)  is  not  a  means of  seeking  retribution,  but is more a means to ensure payment of money.  The  complainant’s  interest  lies  primarily  in  recovering the money rather than seeing the drawer  of  the  cheque  in  jail.  The  threat  of  jail  is  only  a  mode to  ensure  recovery.  As  against  the  accused  who is willing to undergo a jail term, there is little  available as remedy for the holder of the cheque.  

If  we  were  to  examine  the  number  of  complaints  filed which were ‘compromised’ or ‘settled’ before the  final  judgment  on  one  side  and  the  cases  which  proceeded to judgment and conviction on the other,  we will  find that the bulk was settled and only a  miniscule number continued.”  

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13.  It  is  quite  obvious  that  with  respect  to  the  offence  of  

dishonour  of  cheques,  it  is  the  compensatory  aspect  of  the  

remedy  which  should  be  given  priority  over  the  punitive  

aspect.  There  is  also  some  support  for  the  apprehensions  

raised  by  the  learned  Attorney  General  that  a  majority  of  

cheque bounce cases are indeed being compromised or settled  

by  way  of  compounding,  albeit  during  the  later  stages  of  

litigation  thereby  contributing  to  undue  delay  in  justice-

delivery. The problem herein is with the tendency of litigants  

to belatedly choose compounding as a means to resolve their  

dispute. Furthermore, the written submissions filed on behalf  

of the learned Attorney General have stressed on the fact that  

unlike Section 320 of the CrPC, Section 147 of the Negotiable  

Instruments Act provides no explicit guidance as to what stage  

compounding  can  or  cannot  be  done  and  whether  

compounding can be done at the instance of the complainant  

or  with  the  leave  of  the  court.  As  mentioned  earlier,  the  

learned Attorney General’s submission is that in the absence  

of statutory guidance, parties are choosing compounding as a  

method of last resort instead of opting for it as soon as the  

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Magistrates  take  cognizance  of  the  complaints.  One  

explanation  for  such  behaviour  could  be  that  the  accused  

persons are willing to take the chance of progressing through  

the various stages of litigation and then choose the route of  

settlement  only  when  no  other  route  remains.  While  such  

behaviour  may be  viewed  as  rational  from the  viewpoint  of  

litigants, the hard facts are that the undue delay in opting for  

compounding  contributes  to  the  arrears  pending  before  the  

courts at various levels. If the accused is willing to settle or  

compromise by way of compounding of the offence at a later  

stage of litigation, it is generally indicative of some merit in the  

complainant’s  case.  In  such  cases  it  would  be  desirable  if  

parties  choose  compounding  during  the  earlier  stages  of  

litigation. If however, the accused has a valid defence such as  

a mistake, forgery or coercion among other grounds, then the  

matter can be litigated through the specified forums.  

14. It may be noted here that Section 143 of the Act makes an  

offence  under  Section  138  triable  by  a  Judicial  Magistrate  

First Class (JMFC). After trial, the progression of further legal  

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proceedings  would  depend  on  whether  there  has  been  a  

conviction or an acquittal.  

• In the case of conviction, an appeal would lie to the Court  

of  Sessions  under  Section  374(3)(a)  of  the  CrPC;  

thereafter  a  Revision  to  the  High  Court  under  Section  

397/401 of  the  CrPC and finally  a  petition  before  the  

Supreme Court,  seeking  special  leave  to  appeal  under  

136  of  the  Constitution  of  India.  Thus,  in  case  of  

conviction there will be four levels of litigation.  

• In the case of acquittal  by the JMFC, the complainant  

could appeal to the High Court under Section 378(4) of  

the CrPC, and thereafter for special leave to appeal to the  

Supreme Court under Article 136. In such an instance,  

therefore, there will be three levels of proceedings.   

15.  With  regard  to  the  progression  of  litigation  in  cheque  

bouncing cases, the learned Attorney General has urged this  

Court  to  frame guidelines  for  a  graded scheme of  imposing  

costs on parties who unduly delay compounding of the offence.  

It was submitted that the requirement of deposit of the costs  

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will  act  as  a  deterrent  for  delayed  composition,  since  at  

present, free and easy compounding of offences at any stage,  

however  belated,  gives  an  incentive  to  the  drawer  of  the  

cheque to delay settling the cases for years. An application for  

compounding made after several years not only results in the  

system being burdened but the complainant is also deprived of  

effective justice. In view of this submission, we direct that the  

following guidelines be followed:-

THE GUIDELINES

(i)  In the circumstances, it is proposed as follows:  

(a)  That directions can be given that the Writ of Summons  

be suitably modified making it clear to the accused that  

he  could  make  an application  for  compounding  of  the  

offences at the first or second hearing of the case and  

that if such an application is made, compounding may be  

allowed by the court without imposing any costs on the  

accused.

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(b) If  the  accused  does  not  make  an  application  for  

compounding  as  aforesaid,  then  if  an  application  for  

compounding  is  made  before  the  Magistrate  at  a  

subsequent stage, compounding can be allowed subject  

to the condition that the accused will be required to pay  

10% of the cheque amount to be deposited as a condition  

for  compounding  with  the  Legal  Services  Authority,  or  

such authority as the Court deems fit.

(c)  Similarly,  if  the  application for  compounding is  made  

before the Sessions Court or a High Court in revision or  

appeal,  such  compounding  may  be  allowed  on  the  

condition  that  the  accused  pays  15%  of  the  cheque  

amount by way of costs.

(d) Finally,  if  the  application  for  compounding  is  made  

before the Supreme Court, the figure would increase to  

20% of the cheque amount.

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Let it also be clarified that any costs imposed in accordance  

with  these  guidelines  should  be  deposited  with  the  Legal  

Services Authority operating at the level of the Court before  

which  compounding  takes  place.  For  instance,  in  case  of  

compounding  during  the  pendency  of  proceedings  before  a  

Magistrate’s Court or a Court of Sessions, such costs should  

be  deposited  with  the  District  Legal  Services  Authority.  

Likewise, costs imposed in connection with composition before  

the  High  Court  should  be  deposited  with  the  State  Legal  

Services  Authority  and  those  imposed  in  connection  with  

composition  before  the  Supreme Court  should  be  deposited  

with the National Legal Services Authority.

16.  We  are  also  in  agreement  with  the  Learned  Attorney  

General’s  suggestions  for  controlling  the  filing  of  multiple  

complaints that are relatable to the same transaction. It was  

submitted  that  complaints  are  being  increasingly  filed  in  

multiple  jurisdictions  in  a  vexatious  manner  which  causes  

tremendous harassment and prejudice to the drawers of the  

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cheque. For instance, in the same transaction pertaining to a  

loan taken on an installment  basis  to be repaid in equated  

monthly  installments,  several  cheques  are  taken  which  are  

dated for each monthly installment and upon the dishonor of  

each of such cheques, different complaints are being filed in  

different courts which may also have jurisdiction in relation to  

the complaint.  In light of  this submission,  we direct  that it  

should be mandatory for the complainant to disclose that no  

other complaint has been filed in any other court in respect of  

the same transaction. Such a disclosure should be made on a  

sworn affidavit which should accompany the complaint filed  

under  Section  200  of  the  CrPC.  If  it  is  found  that  such  

multiple complaints have been filed, orders for transfer of the  

complaint  to  the  first  court  should  be  given,  generally  

speaking, by the High Court after imposing heavy costs on the  

complainant for resorting to such a practice. These directions  

should be given effect prospectively.  

17.  We  are  also  conscious  of  the  view  that  the  judicial  

endorsement of the above quoted guidelines could be seen as  

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an act of judicial law-making and therefore an intrusion into  

the legislative domain. It must be kept in mind that Section  

147 of the Act does not carry any guidance on how to proceed  

with  the  compounding  of  offences  under  the  Act.  We  have  

already  explained  that  the  scheme  contemplated  under  

Section 320 of the CrPC cannot be followed in the strict sense.  

In  view of  the  legislative  vacuum,  we  see  no  hurdle  to  the  

endorsement of some suggestions which have been designed to  

discourage litigants from unduly delaying the composition of  

the  offence  in  cases  involving  Section  138  of  the  Act.  The  

graded scheme for  imposing costs  is  a  means to encourage  

compounding at an early stage of litigation. In the status quo,  

valuable time of the Court is spent on the trial of these cases  

and the parties are not liable to pay any Court fee since the  

proceedings are governed by the Code of Criminal Procedure,  

even though the impact of the offence is largely confined to the  

private  parties.  Even though the imposition  of  costs  by the  

competent court is a matter of discretion, the scale of costs  

has  been  suggested  in  the  interest  of  uniformity.  The  

competent Court can of course reduce the costs with regard to  

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the specific facts and circumstances of a case, while recording  

reasons in writing for such variance. Bona fide litigants should  

of course contest the proceedings to their logical end. Even in  

the past, this Court has used its power to do complete justice  

under Article 142 of the Constitution to frame guidelines in  

relation  to  subject-matter  where  there  was  a  legislative  

vacuum.   

18. The present set of appeals are disposed of accordingly.  

………………………… CJI (K.G. BALAKRISHNAN)  

…………………………. J.  (P. SATHASIVAM)

 …………………………. J.  

(J.M. PANCHAL)  New Delhi  May 03,  2010   

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